Reserve Bank of India Deputy Governor K C Chakrabarty has acquired a formidable reputation for plain speaking. At a time when most public sector bankers are wallowing in self-pity and blaming the wheezing economy for their ballooning non-performing assets (NPAs), which have more than doubled in the last three years, Dr Chakrabarty did full justice to his reputation at a gathering of bankers recently when he said that the reason for higher NPAs in public sector banks was "non-performing administration": poor project appraisal techniques, herd mentality, lack of accountability, post-disbursal supervision, etc. In short, decision making in public sector banks has been impressionistic rather than information-based. This is true even if given a certain lack of freedom to pick and choose borrowers. Public sector banks are eager, for example, to fund power distribution companies with negative net worth. The deputy governor is correct to conclude that the public sector bank managements' ability to price risks is inferior to that of their private sector counterparts.
Public sector bank managements say their private sector counterparts have more prudent lending practices largely because no finance ministry mandarin is breathing down their necks. Regardless, this debate has gone on for far too long and the solution lies not in any big-bang reforms, but in a simple executive action. Given that the government is in no position to bring down its ownership in public sector banks to below 51 per cent because of political reasons and Parliament's logjam, it should at least issue executive orders to change the appointment process of these banks' top management. Junk the process of selecting chairpersons and executive directors from within the available pool of public sector bankers and widen the selection basket. Past proposals for a selection board run by professionals free to search for candidates across the financial sector have sadly been torpedoed by vested interests.
Bank chairpersons and executive directors should get fixed tenures of, say, five years and higher salaries (the pride of leading a state-run bank is not so overwhelming that outside talent will ignore crores for a few lakhs). A substantial part of the pay should be linked with performance, as prescribed by the Narasimham Committee in 1997, and the A K Khandelwal panel - which suggested stock options for top 15 per cent performers in each state-run bank, better remuneration for CEOs and distribution of at least two per cent of net profit towards incentives and rewards. Yet ad hocism still rules the roost in the selection process, and most public sector bank chiefs have a short tenure of two years or a little more. This means many of them spend the first few quarters cleaning up the balance sheet to prove that their predecessor was not a prudent banker - but as their retirement approaches, they fall into the same trap and stop declaring bad assets to show better profits. The government should stop obsessing about micro-managing these banks and adopt a hands-off approach to selecting their heads.
